Citigroup Was Running the Above Dark Pools and Opaque Trading Venues in 2014

Last Friday, the Securities and Exchange Commission issued a 372-word press release that carried the title SEC Charges Citigroup for Dark Pool Misrepresentations. Buried within that press release was a brief sentence casually mentioning that a division of Citigroup had “failed to register as a national securities exchange.”

Since the thrust of the SEC’s press release was that the big travesty Citigroup had committed was to allow high frequency traders to operate within one of its Dark Pools while lying to its customers about that, this became the sole focus in multiple news articles on the matter. See here and here.

The SEC also buried the information that Citigroup was running an illegal stock exchange within its cease-and-desist order and settlement document. In fact, what the SEC actually did was to dump two vastly different violations of security law – lying to customers and running an illegal stock exchange – into one enforcement announcement and impose a meaningless $12.9 million fine on Citigroup for disparate violations. (Citigroup reported profits of $4.5 billion in its most recent quarter.) Equally notable, the SEC did not force the serially-charged Citigroup to admit to its violations of law.

According to the SEC’s order, “from at least December 2011 to April 30, 2015,” a unit of Citigroup called Citi Order Routing and Execution, LLC (CORE) operated as a stock exchange “by virtue of providing Citi Match as a marketplace for NMS [National Market System] stocks.” During that more than 3-year period when CORE was operating as an illegal stock exchange, without ever registering with the SEC as an exchange, Citi Match executed more than 7 billion shares of stock according to the SEC order. That’s a lot of stock to be trading without any regulatory eyes watching over you. One has good reason to wonder just how much of that stock was Citigroup’s own bank shares – a topic not even touched upon by the SEC order. (See Wall Street Banks Are Trading in their Own Company’s Stock: How Is This Legal?)

Citigroup’s CORE division was previously known as Automated Trading Desk Financial Services (ATD). The ATD name was used through at least May 16, 2016 when Citadel Securities announced that it was buying certain undisclosed assets of ATD from Citigroup for an undisclosed amount of money.

Citigroup originally purchased ATD in 2007 for $680 million in cash and stock. Unfortunately, the cash portion was only about $102.6 million. As the financial crisis of 2008-2009 unfolded and Citigroup imploded from reckless management and toxic debt, its stock lost over 80 percent of its value. Key ATD shareholders filed a class action lawsuit against Citigroup which the company settled for $590 million in 2012.

Patterson also provides this interesting history on ATD’s roots: “In the 1980s, a finance professor named David Whitcomb and James Hawkes, a computer engineer who taught at the College of Charleston in South Carolina, had devised algorithms to predict the outcomes of horse races. They eventually applied those same algos to the stock market and launched ATD from Hawkes’s Mount Pleasant home.”

Patterson explains that ATD “designed an artificial intelligence program” that could predict “where prices would go during a period of roughly thirty seconds to two minutes.” It named its pricing engine “BORG,” “a nod to the race of evil cyborgs from the popular TV show Star Trek: The Next Generation.”

In June of 2014, Wall Street On Parade took a look into ATD. The ATD website said that it was trading on average “200 million shares a day.” That would be roughly 1 billion shares a week or roughly 52 billion shares a year. That would seem to call into question the 7 billion shares that the SEC says CORE’s Citi Match traded between December 2011 to April 30, 2015, although it is certainly possible that ATD was using other trading platforms.

Citigroup described Citi Match as follows on its website in June of 2014: a “leading internal crossing network, available globally” and “consistently ranked in the top two dark pools in Europe. It offers anonymous access to premium liquidity and price improvement.”

Today, the commercial bank of Citigroup, Citibank, carries this reference to Citi Match on its website: “Citi Match is Citi’s crossing/dark pool service for Hong Kong, Japan and Australia. It provides anonymous crossing of buy and sell orders supporting a number of products…with the potential to attain executions at more favorable prices than on the exchanges.”

It would certainly appear that the SEC’s most recent enforcement action has provided a mere sliver of sunshine into the trading activities of Citigroup – a company that blew itself up just a decade ago and received the largest taxpayer bailout in U.S. history.